German Group Insolvency Law Now Effective - What Will It Bring?

Exactly one year after the publication in the federal gazette, the new German group insolvency law has become effective on April 21, 2018.For years, the group insolvency law reform was under discussion in legislature and by practitioners and academics. Then, the German parliament – the Bundestag – passed the reform surprisingly fast right before the end of the four-year legislative session in 2017. Since then the discussion on the German group insolvency law has calmed down. Under European law, the new group insolvency law in the European Insolvency Regulation no. 848/2015 is applicable since June 26, 2017. However, noteworthy cases under the new rules have not yet come up. So what will the new German group insolvency law bring?

Please find a further discussion of this topic in our newsletter below.

The German group insolvency law applies to all company groups with at least two legal entities and essentially governs three areas:

• Group Jurisdiction and one Insolvency Administrator

The new sec. 3a-e of the German Insolvency Code (Insolvenzordnung – InsO) introduce the concept of group jurisdiction (“Gruppen-Gerichtsstand”) in insolvency. Upon petition, all German group members’ insolvency proceedings can now be administered before one insolvency court and one insolvency judge.

These rules simplify case administration and will be well received in practice. This includes the sensible sec. 56b InsO recommending – not mandating – courts to appoint only one insolvency administrator for all insolvency proceedings of group members. This has already been the successful practice before many courts – a practice now confirmed by statute.

• Duty to Cooperate

The second area of the reform in sec. 269a-c InsO addresses cases – contrary to sec. 3a-c, 56b InsO – with more than one insolvency administrator and insolvency court. To optimize the case administration, sec. 269 a and b InsO oblige the insolvency administrators and insolvency courts to cooperate and to exchange information. However, this obligation only goes as far as the interests of the particular insolvency proceedings permit. The creditors’ committees may demand the appointment of a group creditors’ committee (“Gruppen-Gläubigerausschuss”) to facilitate a coordinated administration of the proceeding (sec. 269c InsO).

Without any doubt, the introduction of explicit obligations to cooperate improves case administration. Yet it is now important that the parties in fact support cooperation and do not withdraw unnecessarily behind a perceived shield of the interests of particular insolvency proceedings.

• Coordination Proceedings

The new coordination proceedings in sec. 269 d-i InsO are the third and most innovative part of the reform. This tool allows the group members’ insolvency proceedings to coordinate the administration of their cases under the supervision of an insolvency court acting as the “coordination court (Koordinationsgericht)”. Upon petition, the court appoints a coordinator (“Verfahrenskoordinator”) who may in particular prepare a coordination plan, discuss the plan in all individual insolvency proceedings of the group and have the plan confirmed by the court. The plan may list any measures that serve to coordinate the insolvency proceedings, for example proposals for an operative restructuring of the group, for mechanisms to settle disputes and for agreements among insolvency administrators.

The group members’ insolvency administrators are obliged to cooperate with the coordinator, but are not bound by the coordination plan. However, insolvency administrators intending to deviate from the plan have to explain their reasons for doing so in their respective insolvency proceeding. The creditors’ meeting may then resolve that the insolvency administrator nevertheless has to draft an insolvency plan based on the coordination plan.

The coordination proceeding shows the soft law approach of the legislator: The reform does not force the parties to coordinate the group members’ insolvency proceedings. Instead, it provides the parties with the tools for such coordination. The legislator expressly ruled out a more far reaching reform such as any substantive or administrative consolidation of cases.

• Coordinators at the Gate?

Practice will quickly accept the new single place of jurisdiction for the entire insolvency group. The insolvency courts will also continue to often appoint only one insolvency administrator for entire company groups – now on the basis of the new sec. 56b InsO.

Cases with more than one insolvency court and insolvency administrator – thus, requiring coordination – are especially common in international group insolvencies. Still the practice here is expected to apply the new coordination proceedings slowly at best – whether under German or under European law. Some provisions are not entirely clear in detail and with a view to their consequences; they require further interpretation by the courts. Nevertheless, it is desirable that the practice soon gathers first experience with coordinators under German or European law in order to take full advantage of the potential of the new tools. Conflicts between insolvent group members may be costly for creditors absent any reasonable and consensual solutions. In such cases, a coordinator can mediate between the parties and facilitate agreements which the parties alone may not be able to reach.

• Early Selection of the Coordinator Recommendable

Delays in insolvency proceedings endanger the continued existence of companies and may cost jobs. Thus, parties should consider to select and appoint the coordinator before conflicts between group members – including their insolvency creditors – intensify or escalate. This approach is not directly embedded in the reform, but nothing prevents the parties to agree on the person of a future or potential coordinator already at the beginning of the proceeding. For example, the parties may initiate a coordination proceeding which then remains inactive without incurring any further costs. As soon as the need arises for the coordinator to get involved, he may resume his role without any delay.

• More Certainty but no Guarantee for Cooperation

In sum, the new group insolvency law brings more certainty into the preparation of a company group restructuring. In the event of significant conflicts between company groups or their creditors, however, much depends on whether the parties are willing to cooperate. Here, the coordinator acting as a mediator can make important contributions to effective case administration for all group members’ insolvency proceedings.

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